Methods, systems, and computer program products for providing low risk portable alpha investment instruments

ABSTRACT

Provided are methods of providing a portable alpha investment instrument. Some embodiments of such methods include allocating a first portion of a financial asset to a first asset class, allocating a second portion of the financial asset to a second asset class, establishing a swap transaction corresponding to the first portion of the financial asset, the swap transaction configured to define a minimum term corresponding to an asset status change, and transferring the first portion and the second portion of the financial asset responsive to the allocating.

RELATED APPLICATIONS

This U.S. non-provisional patent application claims priority under 35U.S.C. §120 as a divisional of U.S. patent application Ser. No.11/946,429, filed Nov. 28, 2007 now U.S. Pat. No. 8,046,285, thedisclosure of which is hereby incorporated herein by reference in itsentirety.

FIELD OF THE INVENTION

The present invention relates to commercial applications and, moreparticularly, to methods, systems and computer program products relatedto investment instruments.

BACKGROUND

The investment industry has generated a variety of investment solutionsfor improving returns to investors while reducing potential downsiderisks. One such solution includes strategies referred to as portablealpha solutions. A portable alpha solution is an investment techniquethat may combine two independent return streams. One of the returnstreams may be attributed to some type of market exposure (beta) and oneof the return streams may be attributed to investment manager'sdeliberate exploitation of market inefficiency (alpha). Reference is nowmade to FIG. 1, which is a flow diagram illustrating conventionaloperations for providing a portable alpha fund. As illustrated a totalportfolio return 14 may include a market return (beta) 10 and an excessreturn (alpha) 12. In this manner, an investor may realize gains thatexceed market return by virtue of an investment manager's skills.

Reference is now made to FIG. 2, which is a flow diagram illustratingtransactions corresponding to a conventional portable alpha fund. Aninvestor 20 invests in the portable alpha fund 22. To acquire a betareturn stream, the portable alpha fund 22 purchases exposure to a marketindex from a bank 24 or other financial institution. In exchange forreceiving index returns from the bank 24, a portable alpha fund 22 paysthe bank 24 an interest rate, such as the London Interbank Offered Rate(LIBOR), plus a spread, which may represent a profit source for the bank24. The exposure to a market index purchased from the bank 24 may beleveraged such that only a fraction of the amount of exposure purchasedis required for the purchase. For example, futures contracts and/oroptions on a market index may be purchased in lieu of or in addition topurchasing shares of an index fund. In this manner, the portable alphafund 22 acquires a beta return stream. An alpha return stream may beacquired by the portable alpha fund 22 through a purchase of shares in ahedge fund 26. Conventional portable alpha strategies may experiencelimited effectiveness using conventional approaches.

SUMMARY

Embodiments of the present invention are directed to methods forproviding a portable alpha investment instrument. Some embodiments ofsuch methods include allocating a first portion of a financial asset toa first asset class, allocating a second portion of the financial assetto a second asset class, establishing a swap transaction correspondingto the first portion of the financial asset, the swap transactionconfigured to define a minimum term corresponding to an asset statuschange, and transferring the first portion and the second portion of thefinancial asset responsive to the allocating. In some embodiments, thefirst portion and/or the second portion may be transferred to one ormore accounts corresponding to one or more investment banks, amongothers.

In some embodiments, the first asset class includes a composite indexcorresponding to multiple securities. In some embodiments, thesecurities are selected using fundamental value methods. In someembodiments, allocating the first portion includes purchasing aleveraged position of the composite index via a derivative instrument ofthe composite index.

In some embodiments, allocating the second portion includes purchasingshares in multiple time-value-based securities. In some embodiments, thetime-value-based securities include financial and/or commodityderivatives selected by at least one commodity trading advisor and/ormanaged futures trader.

In some embodiments, establishing the swap transaction includesexchanging a first return corresponding to a first term for a secondreturn corresponding to a second term, wherein the first term issubstantially shorter than the second term. In some embodiments, theasset status change includes a tax status change corresponding to achange from a combined short term capital gain and long term capitalgain tax liability to an exclusively long term capital gain taxliability.

In some embodiments, establishing the swap includes establishingmultiple fractional swaps, wherein any of the fractional swaps may beterminated prior to the asset status change. In some embodiments, thesecond asset class performs with a negative correlation relative to aperformance of the first asset class. In some embodiments, a performanceof the second asset class is substantially uncorrelated with aperformance of the first asset class.

Some embodiments include a computer program product, the computerprogram product including a computer usable storage medium havingcomputer-readable program code embodied in the medium, the computerreadable program code configured to perform allocating a first portionof a financial asset to a first asset class and allocating a secondportion of the financial asset to a second asset class. Some embodimentsof the computer readable program code may be configured to performestablishing a swap transaction corresponding to the first portion ofthe financial asset, the swap transaction configured to define a minimumterm corresponding to an asset status change and transferring the firstportion and the second portion of the financial asset responsive to theallocating.

Some embodiments of the present invention include a system for investingin multiple asset classes. Some embodiments of such a system may includea beta asset selector that is configured to select a beta asset class,an alpha asset selector that is configured to select an alpha assetclass that is different from the beta asset class, and a term converterthat is configured to convert a first term corresponding to the betaasset into a second term corresponding to the beta asset class.

In some embodiments, the alpha selector is configured to select thealpha asset class that includes a negative market movement correlationrelative to the beta asset class. In some embodiments, the alphaselector is configured to select the alpha asset class that includesuncorrelated market movement relative to the beta asset class.

In some embodiments, the beta asset class includes a composite stockindex and the alpha asset class includes managed futures and/or acommodity index corresponding to multiple time-value-based securities.In some embodiments, the beta asset class includes a RAFI™ index and thealpha asset class includes a commodity trading advisor fund. In someembodiments, the term converter is further configured to establish aswap transaction of a first beta asset class return corresponding to thefirst term for a second beta asset class corresponding to the secondterm, such that the first term is substantially shorter than the secondterm.

In some embodiments, the swap transaction includes a rolling swaptransaction, that includes multiple fractional swap transactions suchthat any of the fractional swap transactions may be terminated prior tothe contract term without affecting the other of the plurality of thefractional swap transactions.

In some embodiments, the term converter is further configured to converta first volatility of alpha asset class return corresponding to thefirst term to a second volatility of alpha asset class corresponding tothe second term and the first term is substantially shorter than thesecond term. In some embodiments, the second term is sufficiently longto cause a tax status change.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 is a flow diagram illustrating conventional operations forproviding a portable alpha fund.

FIG. 2 is a flow diagram illustrating transactions corresponding to aconventional portable alpha fund.

FIG. 3 is a flow diagram illustrating a system for investing in multipleasset classes according to some embodiments of the present invention.

FIG. 4 is a block diagram illustrating operations for providing aportable alpha investment instrument according to some embodiments ofthe present invention.

FIG. 5 is a flow diagram illustrating transactions corresponding to aportable alpha investment according to some embodiments of the presentinvention.

FIG. 6 is a graph illustrating negatively correlated first and secondasset classes in a portable alpha investment instrument according tosome embodiments of the present invention.

FIG. 7 is a graph illustrating uncorrelated first and second assetclasses in a portable alpha investment instrument according to someembodiments of the present invention.

DETAILED DESCRIPTION OF EMBODIMENTS OF THE INVENTION

The present invention now will be described more fully with reference tothe accompanying drawings, in which embodiments of the invention areshown. However, this invention should not be construed as limited to theembodiments set forth herein. Rather, these embodiments are provided sothat this disclosure will be thorough and complete, and will fullyconvey the scope of the invention to those skilled in the art. Likenumbers refer to like elements throughout.

As used herein, the term “comprising” or “comprises” is open-ended, andincludes one or more stated features, integers, elements, steps,components or functions but does not preclude the presence or additionof one or more other features, integers, elements, steps, components,functions or groups thereof.

As used herein, the term “and/or” includes any and all combinations ofone or more of the associated listed items.

As used herein, the common abbreviation “e.g.”, which derives from theLatin phrase “exempli gratia,” may be used to introduce or specify ageneral example or examples of a previously mentioned item, and is notintended to be limiting of such item. If used herein, the commonabbreviation “i.e.”, which derives from the Latin phrase “id est,” maybe used to specify a particular item from a more general recitation.

The terminology used herein is for the purpose of describing particularembodiments only and is not intended to be limiting of the invention. Asused herein, the singular forms “a”, “an” and “the” are intended toinclude the plural forms as well, unless the context clearly indicatesotherwise.

Unless otherwise defined, all terms (including technical and scientificterms) used herein have the same meaning as commonly understood by oneof ordinary skill in the art to which this invention belongs. It will befurther understood that terms, such as those defined in commonly useddictionaries, should be interpreted as having a meaning that isconsistent with their meaning in the context of this specification andthe relevant art and will not be interpreted in an idealized or overlyformal sense unless expressly so defined herein.

Well-known functions or constructions may not be described in detail forbrevity and/or clarity.

The present invention may be embodied as methods, systems, and/orcomputer program products. Accordingly, the present invention may beembodied in hardware and/or in software (including firmware, residentsoftware, micro-code, etc.), which may be generally referred to hereinas a “circuit” or “module”. Furthermore, the present invention may takethe form of a computer program product on a computer-usable orcomputer-readable storage medium having computer-usable orcomputer-readable program code embodied in the medium for use by or inconnection with an instruction execution system. In the context of thisdocument, a computer-usable or computer-readable medium may be anymedium that can contain, store, communicate, or transport the programfor use by or in connection with the instruction execution system,apparatus, or device.

Embodiments of the invention herein may be generally directed tosystems, methods and computer program products for investing in multipleasset classes and/or providing portable alpha investment instruments.For example, improved investment performance may be realized byselecting uncorrelated and/or unconventional asset classes andestablishing a tax favorable swap transaction.

Reference is now made to FIG. 3, which is a flow diagram illustrating asystem 100 for investing in multiple asset classes according to someembodiments of the present invention. The illustrated system 100receives a financial asset 90 from an investor. The system 100 includesa beta asset selector 102 that is configured to select a beta assetclass 110. In some embodiments, the beta asset class 110 includes acomposite stock index. For example some embodiments provide that thebeta asset class 110 includes an index based on fundamental analysissuch as, for example, Research Affiliates Fundamental Index (RAFI). Incontrast with capitalization weighted market indices, which may selectstocks based on market capitalization, fundamentally based indices areindices in which stocks are weighted by a fundamental factor (e.g.,sales, book value, dividends) and/or a composite of fundamental factors.By using fundamentally based indices, pitfalls that may be associatedwith capitalization weighted indices such as, for example, overweightingovervalued stocks and underweighting undervalued stocks, may be avoided.

The system 100 includes an alpha asset selector 106 that is configuredto select an alpha asset class 114. In some embodiments, the alpha assetselector 106 may be configured to select an alpha asset class 114 thatincludes a negative market movement correlation relative to the betaasset class 110. In some embodiments, the alpha asset selector 106 maybe configured to select the alpha asset class 114 that includesuncorrelated market movement relative to the market movement of the betaasset class 110.

In some embodiments, the alpha asset class 114 may include managedfutures and/or a commodity index corresponding to multipletime-value-based securities. For example, some embodiments may providethat the alpha asset class 114 includes a commodity trading advisor(CTA) fund. A CTA fund may include a fund in which one or more fundmanagers receive compensation for trading a managed futures and/oroptions account. Futures and options may be described as time valuebased securities that are derivatives of a commodity, currency, and/orcomposite index, among others.

Some embodiments of the system 100 may include a term converter 104 thatis configured to convert a first-term corresponding to the beta assetclass 110 into a second term corresponding to the beta asset class 110.In this manner, a second term beta 112 may be received in the system100. In some embodiments, the term converter 104 may be configured toestablish a swap transaction of a first beta asset class returncorresponding to the first term for second beta asset classcorresponding to the second term. Some embodiments provide that thefirst term may be substantially shorter than the second term.

By way of example, the swap transaction may include contracting with alarge investment bank that will, on behalf of the system 100, purchaseand hold positions corresponding to all of the securities in one or morespecific composite indices in the correct weights. In some embodiments,the composite index securities are leveraged through, for example,futures and/or options, among others. In exchange for holding thesecurities, the system 100 may provide collateral in the form of arelatively stable securities such as, for example, bonds, treasurybills, cash and/or money market shares. The system 100 may pay theinvestment bank monthly interest payments over the term of the contract.In some embodiments, the system 100 may provide additional capital tomeet margin requirements corresponding to negative changes in the valueof the composite index securities. At the end of the contract term, theinvestment bank pays the system 100 corresponding to any increase invalue of the composite index securities.

In some embodiments, the second term may be sufficiently long so as toshift a tax status from short term capital gains to long term capitalgains, which may be taxed at a lower tax rate. For example, in someembodiments, the second term may be greater than twelve months.

In some embodiments, the swap transaction includes a rolling swaptransaction. For example, the swap transaction may include multiplefractional swap transactions such that any of the fractional swaptransactions may be terminated prior to the contract term withoutaffecting the other fractional swap transactions. A rolling swap mayprovide flexibility to address liquidity shortfalls that may occurduring the second term. In this regard, if one of the fractional swaptransactions is terminated prematurely, the tax status change may beunavailable for that fractional swap transaction without affecting thetax status change corresponding to the other of the fractional swaptransactions.

In some embodiments, the term converter 104 may be further configured toconvert a first term alpha asset class return corresponding to the firstterm into a second term alpha asset class corresponding to the secondterm that is shorter than the first term. In this regard, the alphaasset class transactions may change status regarding incomeclassification for income tax purposes.

Reference is now made to FIG. 4, which is a block diagram illustratingoperations for providing a portable alpha investment instrumentaccording to some embodiments of the present invention. Some embodimentsprovide that the first portion of a financial asset is allocated to afirst asset class (block 120). In some embodiments the first asset classincludes a composite index corresponding to multiple securities.Examples of composite indices include the Dow Jones Industrial Average(DJIA), Standard and Poor's 500 (S&P 500), New York Stock Exchangecomposite index (NYSE), and the Research Affiliates Fundamental Index1000 (RAFI), among others.

In some embodiments, securities selected corresponding to the compositeindex may be selected using fundamental value methods. In contrast withcapitalization weighted market indices, which may select stocks based onmarket capitalization, fundamental value indices may select securitiesbased on fundamental values such as, for example, sales, book value,and/or dividends, among others. By using fundamentally based indices,pitfalls that may be associated with capitalization weighted marketindices such as, for example, overweighting overvalued stocks andunderweighting undervalued stocks, may be avoided.

In some embodiments, allocating the first portion of the financial assetmay include purchasing one or more leveraged positions of the compositeindex using derivative instruments of the composite index. Examples ofderivative instruments include, but are not limited to, futurescontracts and/or options, among others.

Some embodiments may include allocating a second portion of thefinancial asset to a second asset class (block 122). In someembodiments, allocating the second portion includes purchasing shares inmultiple time-value-based securities. In some embodiments, thetime-value-based securities may include one or more commodityderivatives that may be selected by at least one commodity tradingadvisor and/or managed futures trader. In some embodiments, thecommodity derivatives may include derivatives of one or morecommodities, currencies, and/or composite indices, among others.

In some embodiments, the second asset class may perform with a negativecorrelation relative to a performance of the first asset class. In someembodiments, the performance of the second asset class may besubstantially uncorrelated with the performance of the first assetclass. By providing negatively and/or uncorrelated asset classes,overall risk of loss due to poor market performance may be reduced.

In some embodiments, providing a portable alpha investment instrumentmay also include establishing a swap transaction corresponding to thefirst portion of the financial asset (block 124). In some embodiments,the swap transaction may be configured to define a minimum termcorresponding to an asset status change. In some embodiments,establishing the swap transaction may include exchanging a first returncorresponding to a first term for a second return corresponding to asecond term such that the first term may be substantially shorter thanthe second term. For example, in some embodiments, an asset statuschange includes a tax status change corresponding to a change from acombined short term capital gain and a long term capital gain taxliability to an exclusively long term capital gain tax liability.

In some embodiments, establishing the swap transaction includesestablishing multiple fractional swap transactions such that any of thefractional swap transactions may be terminated prior to the asset statuschange. In this regard, an early termination of one of the fractionalswap transactions may occur prior to the asset status change regardingthe terminated fractional swap transaction without affecting the assetstatus change of the other fractional swap transactions.

In some embodiments, establishing the swap transaction may includeestablishing a rolling swap transaction that may include multiplefractional swap transactions that are temporally delayed and/orstaggered regarding initiation and/or termination. In this regard,flexibility to respond to changing market conditions such as, forexample, interest rates and/or composite index performances may beincreased. For example, multiple swap transactions that terminate atquarterly intervals relative to one another may be utilized instead ofsingle and/or multiple swap transactions that occur simultaneously.

In some embodiments, operations for providing a portable alphainvestment instrument may include transferring the first portion of thefinancial asset and the second portion of the financial asset responsiveto allocations determined herein (block 126). For example, someembodiments may provide for transferring funds and/or collateral intoaccounts, to investment banks, fund managers, investment accounts,and/or holding accounts, among others.

Reference is now made to FIG. 5, which is a flow diagram illustratingtransactions corresponding to a portable alpha investment according tosome embodiments of the present invention. An investor 140 invests inthe portable alpha fund 142. To acquire a beta return stream, theportable alpha fund 142 purchases exposure to a market index from a bank144 or other financial institution. In exchange for receiving long termreturns corresponding to the market index, a portable alpha fund 142 maypay the bank 24 a short term return plus an additional transaction cost.In some embodiments, the short term return may be determined by an indexand/or institutionalized interest rate, such as, for example, the LIBOR.In some embodiments, the long term return may be leveraged such thatonly a fraction of the amount of exposure purchased is required for thepurchase and/or collateral. For example, futures contracts and/oroptions on a market index may be purchased in lieu of or in addition topurchasing shares of an index fund. In this manner, the portable alphafund 142 acquires a beta return stream. An alpha return stream may beacquired by the portable alpha fund 142 through a purchase of shares ofa commodity trading advisor and/or managed futures fund 146.

In some embodiments, the market exposure corresponding to the betareturn stream may be leveraged such that only a percentage of the totalinvestment is required to obtain exposure equal to the total investment.The remaining portion of the investment may be used to buy into thealpha revenue stream.

Brief reference is now made to FIG. 6, which is a graph illustratingnegatively correlated first and second asset classes in a portable alphainvestment instrument according to some embodiments of the presentinvention. As illustrated, the market performance of a CTA 150 may benegatively correlated to that of a composite index 152. For example,during the time period defined as T1, the composite index 152 exhibits apositive performance and the CTA 150 exhibits a negative performance.Similar observations regarding divergent market performance associatedwith a negative correlation in time periods T2, T3 and T4 are thusillustrated.

Brief reference is now made to FIG. 7, which is a graph illustratinguncorrelated first and second asset classes in a portable alphainvestment instrument according to some embodiments of the presentinvention. As illustrated, the market performance of a CTA 150 may beuncorrelated relative to that of a composite index 152. For example,during the time periods defined as T1 and T4, the composite index andthe CTA perform in the same general direction as one another. Note,however, that even though directionally similar during periods T1 andT4, they each exhibit different relative volatility. For example, duringperiod T1, the composite index 152 includes a greater rate of changethan the CTA 150. In contrast, during the T4, period, the CTA 150includes a greater rate of change than the composite index 152. Incontrast with periods T1 and T4, the CTA 150 and composite index 152move in opposite directions relative to one another during periods T2and T3. For example, during T2, the CTA 150 performs in a generallypositive manner whereas the composite index 152 performs in asignificantly negative manner. Further, during T3, the CTA 150 moves ina negative manner and the composite index 152 moves in a positivemanner. Thus, the performances of the composite index 152 and the CTA150 are substantially uncorrelated.

As will be appreciated by one of skill in the art, the present inventionmay be embodied as a method, system, business method and/or computerprogram product. Accordingly, the present invention may take the form ofan entirely hardware embodiment, an entirely software embodiment or anembodiment combining software and hardware aspects, all generallyreferred to herein as a “circuit” or “module.”

Embodiments according to the present invention are described withreference to block diagrams and/or operational illustrations of methodsand communication terminals. In this regard, each block may represent amodule, segment, or portion of code, which comprises one or moreexecutable instructions for implementing the specified logicalfunction(s). It is to be understood that each block of the blockdiagrams and/or operational illustrations, and combinations of blocks inthe block diagrams and/or operational illustrations, can be implementedby radio frequency, analog and/or digital hardware, and/or programinstructions. These program instructions may be provided to acontroller, which may include one or more general purpose processors,special purpose processors, ASICs, and/or other programmable dataprocessing apparatus, such that the instructions, which execute via thecontroller and/or other programmable data processing apparatus, createmeans for implementing the functions/acts specified in the blockdiagrams and/or operational block or blocks. In some alternateimplementations, the functions/acts noted in the blocks may occur out ofthe order noted in the operational illustrations. For example, twoblocks shown in succession may in fact be executed substantiallyconcurrently or the blocks may sometimes be executed in the reverseorder, depending upon the functionality/acts involved.

These computer program instructions may also be stored in acomputer-usable or computer-readable memory that may direct a computeror other programmable data processing apparatus to function in aparticular manner, such that the instructions stored in the computerusable or computer-readable memory produce an article of manufactureincluding instructions that implement the function specified in theflowchart and/or block diagram block or blocks.

The computer-usable or computer-readable medium may be, for example butnot limited to, an electronic, magnetic, optical, electromagnetic,infrared, or semiconductor system, apparatus, or device. More specificexamples (a nonexhaustive list) of the computer-readable medium includethe following: hard disks, optical storage devices, magnetic storagedevices, a portable computer diskette, a random access memory (RAM), aread-only memory (ROM), an erasable programmable read-only memory (EPROMor Flash memory), and a compact disc read-only memory (CD-ROM and/orDVD-ROM).

Computer program code for carrying out operations of the presentinvention may be written in an object oriented programming language suchas Java®, Smalltalk or C++, a conventional procedural programminglanguages, such as the “C” programming language, or lower-level code,such as assembly language and/or microcode. Embodiments of the presentinvention, however, are not limited to any particular programminglanguage. The program code may execute entirely on a single processorand/or across multiple processors, as a stand-alone software package oras part of another software package.

The computer program instructions may also be loaded onto a computer orother programmable data processor to cause a series of operational stepsto be performed on the computer or other programmable processor toproduce a computer implemented process such that the instructions whichexecute on the computer or other programmable processor provide stepsfor implementing the functions or acts specified in the flowchart and/orblock diagram block or blocks.

In the drawings and specification, there have been disclosed exemplaryembodiments of the invention. Although specific terms are employed, theyare used in a generic and descriptive sense only and not for purposes oflimitation, the scope of the invention being defined by the followingclaims.

1. A system for investing in multiple asset classes, comprising: a betaasset selector that is configured to select a beta asset class; an alphaasset selector that is configured to select an alpha asset class that isdifferent from the beta asset class; and a term converter that isconfigured to convert a first term corresponding to the beta asset to asecond term corresponding to the beta asset class, wherein at least oneof the beta asset selector, the alpha asset selector and the termconverter includes a hardware and/or computer software module.
 2. Thesystem of claim 1, wherein the alpha asset selector is configured toselect the alpha asset class that comprises a negative market movementcorrelation relative to the beta asset class.
 3. The system of claim 1,wherein the alpha asset selector is configured to select the alpha assetclass that comprises uncorrelated market movement relative to the betaasset class.
 4. The system of claim 1, wherein the beta asset classcomprises a composite stock index and wherein the alpha asset classcomprises managed futures and/or a commodity index corresponding to aplurality of time-value-based securities.
 5. The system of claim 1,wherein the beta asset class comprises a RAFI index and the alpha assetclass comprises a Commodity Trading Advisor fund.
 6. The system of claim1, wherein the term converter is further configured to establish a swaptransaction of a first beta asset class return corresponding to thefirst term for a second beta asset class corresponding to the secondterm, wherein the first term is substantially shorter than the secondterm.
 7. The system of claim 6, wherein the swap transaction comprises arolling swap transaction, wherein the swap transaction further comprisesa plurality of fractional swap transactions, and wherein any of theplurality of fractional swap transactions may be terminated prior to thecontract term without affecting the other of the plurality of thefractional swap transactions.
 8. The system of claim 1, wherein the termconverter is further configured to convert a first term alpha assetclass return corresponding to the first term to a second term alphaasset class corresponding to the second term, wherein the first term issubstantially shorter than the second term.
 9. The system of claim 1,wherein the second term is sufficiently long to cause a tax statuschange.